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Fiscal Policy, Foresight and the Trade Balance in the U.S

  • Luca Gambetti

    ()

This paper investigates the effects of fiscal policy on the trade balance using a structural factor model. A fiscal policy shock worsens the trade balance and produces an appreciation of the domestic currency but the effects are quantitatively small. The findings match the theoretical predictions of the standard Mundell-Fleming model, although fiscal policy should not be con- sidered one of the main causes of the large US external deficit. My conclusions differ from those reached using VAR models since the fiscal shock, possibly due to fiscal foresight, is nonfunda- mental for the variables typically used in open economy VARs.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 852.10.

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Length: 26
Date of creation: 01 Sep 2010
Date of revision:
Handle: RePEc:aub:autbar:852.10
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  9. Jesus Fernandez-Villaverde & Juan Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C's (and D)'s for Understanding VARs," NBER Technical Working Papers 0308, National Bureau of Economic Research, Inc.
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